How Low Can Prices Go?
- WTI crude oil prices break $50 for first time since April 2009.
- Analytic community at odds over extent of decline.
- Technical charts suggest a bottom in the $20s.
- Record production keeps natural gas prices under pressure.
Table covers crude oil and principal products. Other products, including residual fuel oil and “other oils” are not shown, and changes in the stocks of these products are reflected in “Total Petroleum Products.” Statistics Source: Energy Information Administration “Weekly Petroleum Status Report” available at www.eia.doe.gov
The Matrix
Oil prices continue to fall, WTI crude oil breaking below $50 for the first time since April, 2009. This reflects new supply from Russia and Iraq. The International Energy Agency estimates these two countries provided 15 percent of global oil supply in November. There was also softer demand for manufacturing in Europe and China.
The dramatic fall in oil prices has inevitably turned to “How low can prices go?” Commodity markets generally exaggerate reality; no less so in the case of crude oil. The sentiment among analysts has turned overwhelmingly bearish. One bank’s analysts said that “investors should avoid oil until the ‘free fall’ ends.” This begs the question since knowing when the “free fall” ends is the challenge.
Another analyst observed, “It’s not clear that anyone can answer how low it will go. It’s always hard to call a bottom. The Saudis took the shale revolution seriously and are acting accordingly. They’re testing how much production growth can be curtailed by the drop in prices.”
Another expert opined, “Prices remain in a free fall. We think it is too early to call for a solid short-term price floor.”
Powerhouse concurs with still another observer that “There is no evidence yet that non-OPEC supply is contracting which could halt the collapse… It’s increasingly looking like we’ll need to see some forceful exits in terms of supply – it’s almost like a collision course. It’s just a matter of time for that point when a collision course gets noticed.”
Some help might be had from technical charts. Elliott Wave analysis is a forward-looking price analysis system using chart patterns and ratios to project where prices might go. In its most recent iteration, Elliott Wave suggests that a third-wave sell-off may have been completed around $50. A consolidating recovery could ensue, followed by a final, fifth-wave sell-off. The recovery could bring WTI crude oil to $60 per barrel. Elliott Wave suggests a final test into the $20’s as a low. This may take several months to work out.
Supply/Demand Balances
Supply/demand data in the United States for the week ending January 2, 2015 were released by the Energy Information Administration.
Total commercial stocks of petroleum rose 9.9 million net barrels during the week. The largest increases were in gasoline, distillate fuel oil and kero-jet. Crude oil inventories declined. Draws were also reported for residual fuel oil and propane. Stocks of other oils dropped 4.8 million barrels.
Crude oil supplies in the United States fell to 382.4 million barrels; a decline of 3.1 million barrels. This change occurred for the second week in a row.
Gulf Coast crude oil supplies fell 4.0 million barrels. Stocks of crude oil rose in PAD Districts in the Midwest (+2.9 million barrels) and the Rockies (+0.6 million barrels). On the West Coast inventories lost 1.7 million barrels of crude.
Cushing, Oklahoma inventories rose to 32.1 million barrels according to the week’s report. This was an increase of 1.3 million barrels for the report week. Stocks at Cushing have been growing since October 3rd when they bottomed at 18.9 million barrels.
Domestic crude oil production gained slightly to 9.132 million barrels daily. Crude oil imports fell during the week, moving down 0.2 million barrels daily to 6.9 million barrels per day. The trend in imports remains down, confirming the United States’ reduced reliance on foreign crude oil.
Crude oil inputs to refineries rose slightly; there were 16.420 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, declined to 16.7 million barrels daily.
Refinery utilization eased to 93.9 per cent of capacity. Facilities backed off throughout the country, except for the Gulf Coast.
Total petroleum product inventories netted gains of 20.9 million barrels against declines of 11.0 million barrels. Gasoline added 8.1 million barrels to supply. Gains were seen in every PAD District except the Rocky Mountains. The East Coast (+4.7 million barrels) and Midwest (+1.7 million barrels) had the largest gains.
Demand for gasoline fell 805,000 barrels per day to 8.8 million barrels daily. Refinery production also dropped, reaching 8.7 million barrels daily.
Distillate fuel oil stocks added substantially to inventory. Stocks were 136.9 million barrels up 11.2 million barrels. National demand for the week was reported at 2.9 million barrels per day during the report week. This was a weekly decline of 1.4 million barrels daily for the report week.
Propane stocks fell 13.6 million barrels. There are 75.7 million barrels in storage. Current demand is estimated at 1.4 million barrels per day.
Natural Gas
According to EIA: Working gas in storage was 3,089 Bcf as of Friday, January 2, 2015, according to EIA estimates. This represents a net decline of 131 Bcf from the previous week. Stocks were 250 Bcf higher than last year at this time and 67 Bcf below the 5-year average of 3,156 Bcf.
Natural gas futures broke support at $3.00 decisively. Prices dipped to $2.81 on January 6th. Next major support can be found at $2.575, last seen in August, 2012.
Market price weakness can be traced to high levels of production. DOE reported output for single days reaching as high as 73 Bcf and weekly averages above 72.5 Bcf per day in December. High output is likely to continue through 2015 at recent rates notwithstanding price softness.
Financial obligations of producers and increasing efficiency account for this expectation.
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